Signet Jewelers buying Zale for about $900M

The largest U.S. jewelry chain on Wednesday decided to put a ring on its much smaller rival, creating a $6 billion jewelry juggernaut with expansive reach in North America.

Signet Jewelers, owner of Jared The Galleria with its "He went to Jared" slogan and Kay Jeweler with its "Every Kiss Begins with Kay" ads, agreed to buy Zale for roughly $900 million.

Turns out, diamonds aren't just a girl's proverbial best friend; Investors seemed to like them on Wednesday, too. On news of the planned acquisition, Signet's stock rose more than 18 percent, while shares of Zale soared more than 40 percent.

The deal underscores the harsh realities of the $32. 8 billion jewelry business since the Great Recession. Sales of necklaces, rings and other jewels got hammered during the economic downturn as shoppers pulled back on their discretionary purchases.

Now, business is slowly starting to come back during the economic recovery. But there are still a number of jewelry chains in the market, and sales are still far from their pre-recession peak of more than $36 billion in 2006.

"The deal is a rational response to the imbalance of supply and demand," said Craig Johnson, president of Customer Growth Partners, a retail consultancy in New Canaan, Conn. "There are too many stores chasing too few jewelry buyers."

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In fact, analysts say the abundance of stores is a scenario that has played out in malls across the country where some of Signet's stores go head-to-head with Zale's "Zales" branded stores. But they say Signet has fared better.

Signet has 1,400 Jared and Kay stores in the U.S. and 500 stores in the U.K. under the names H. Samuel and Ernest Jones.

Signet Jewelers Ltd., which is based in Bermuda, reported that revenue at stores opened at least a year rose 5 percent during in November and December combined. By division, the sales metric at Kay, which has tried attracting customers by creating exclusive collections, rose 5.6 percent. Jared sales were up 5.6 percent during that period.

On the other hand, Dallas-based Zale Corp. has 1,680 stores in North America under Zales, Gordon's and other names. The company, which went through a liquidity crisis in 2009, has closed hundreds of stores and has been trying to expand its bridal merchandise.

Zale returned to a profit in its most recent fiscal year, which ended July 31. More recently, the company reported its sales at stores open at least one year rose 2 percent in November and December. Zales branded stores had a 4.4 percent increase in the sales for the two-month period.

Together, the Signet and Zale would have 16 percent of the U.S. jewelry market, according to IBISWorld, a market research firm. But even before the acquisition, Signet, with expected annual revenue at $4.2 billion in the latest fiscal year ended in January, was the largest U.S. jewelry chain.

As part of the deal, Signet said it will pay $21 per share for Zale. That's a 41 percent premium to Zale's $14.91 Tuesday closing price. Zale has about 32.9 million outstanding shares, according to FactSet, for which Signet would pay about $690 million.

Part of the deal are about 11.1 million warrants, a security issued by a company that gives the holder the right to buy securities, owned by Golden Gate Capital, a 22 percent stakeholder in Zale, according to Zale spokeswoman Roxane Barry. Signet entered into a voting and support agreement with Golden Gate.

The companies value the deal at $1.4 billion, including assumed debt. Excluding the roughly $500 million in debt Zale had as of Oct. 31, according to SEC filings, but including the price to buy out Golden Gate's warrants, the deal is worth about $900 million.

The acquisition still needs approval from Zale shareholders. Theo Killion is expected to remain Zale CEO. Killion said in a statement that the move will help accelerate growth, coming after Zale completed its "multi-year turnaround program to return to profitability."